The Short Report

This story features SILVER LAKE RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: SLR

By Andrew Nelson

Shorting and short covering in the Australian equity market remained fairly sedate over the period from 9 to 16 January. Activity was spread across a number of sectors, although miners and discretionary plays remain the predominant participants on both the increase and decrease sides of the ledger.

There was very little going on in terms of weekly short position increases, with the biggest move posted by SingTel ((SGT)). Shorts in the telco increased 1.49 percentage points (ppt) from 1.89% to 3.38%. The shares maintain a positive sentiment amongst brokers, with four Buys and three Holds on show in the FNArena Database.

Shorts in OZ Minerals ((OZL)) pushed 1.18ppt higher from 1.71% to 2.89%. Macquarie downgraded its call on the stock to Neutral from Outperform last week as part of a sector wide review, believing 2013 will be another tough year for the company. Paladin ((PDN)) saw its short position increase 1.01ppt from 11.33% to 12.34% despite the company’s December quarter production report being well received, with brokers for the most part remaining concerned about the persistently weak uranium spot price.

On the decrease side, shorts in Silver Lake Resources ((SLR)) came off 7.46ppt from 7.97% to just 0.51% on the heels of implementing the merger with Integra Mining ((IGR)). The count will drop to 0% in the next report, as Silver Lake shares ceased trading on Monday. The merger has created one of the largest all-Australian gold producers around, with a 6.6 million ounce resource base and forecast production of over 400,000 ounces per annum in 2014.

The only other mention on the weekly downside list is Linc Energy ((LNC)), which announced last week it had partnered with DTEK Oil and Gas to evaluate underground coal gasification potential in the Ukraine.

Monthly moves of over 2ppt were also limited, with just three on the increase side and two on the decrease. Fairfax ((FXJ)) booked the biggest increase to its monthly short position, lifting 3.43ppt from 12.15% to 15.58%. The increase has bumped up the stock from three to two on the Top 20 most shorted list. Sentiment remains slightly to the negative, with two Buys, three Holds and three Sells on show in the database.

Shorts in Mesoblast ((MSB)) increased by 3.19ppt from 2.68% to 5.87%. Credit Suisse upgraded its recommendation to Outperform from Neutral last week on news the company had reported a positive outcome for its Phase-2 lumbar spinal fusion trial. The broker was upbeat on the news, noting management can now sit down with the US FDA to discuss Phase-3 trials. Sentiment for the stock remains strong, with three Buys and one Sell on show in the database.

The last significant increase posted on a monthly basis was done so by Paladin ((PDN)). Shorts in the uranium miner increased 3.09ppt from 9.25% to 12.34%. 

With it soon to disappear, Silver Lake Resources also sits atop the monthly decline list, its short position coming off 7.58ppt. With its big weekly move, Linc Energy also finds itself near the top of the monthly decrease list as well. JB HiFi ((JBH)) saw its short position retreat 1.62ppt from 20.59% to 18.97%. However, the move isn’t enough to budge the company out of the top spot on the Top 20 most shorted list.

The Top 20 list itself isn’t much changed other than a few position swaps and the like. Silver Lake dropped from 13 to not on the list, which opened up a spot for Mesoblast to join at the number 20 spot. Bradken ((BKN)) moved to the 14th from 20th spot, while Wotif.com ((WTF)) descended from 16 to 19.
 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	18474691	98850643	18.69
2	FXJ	361324855	2351955725	15.36
3	ILU	63077937	418700517	15.07
4	MYR	79203286	583384551	13.58
5	FLT	13070471	100165616	13.05
6	PDN	99760615	836825651	11.92
7	HVN	121397076	1062316784	11.43
8	DJS	60663036	531788775	11.41
9	MTS	91366483	880704786	10.37
10	TRS	2567209	26092220	9.84
11	CSR	42212806	506000315	8.34
12	COH	4719502	57026689	8.28
13	MND	6889538	90663543	7.60
14	BKN	12189241	169240662	7.20
15	ACR	11705793	166496711	7.03
16	LYC	137331037	1960801292	7.00
17	WSA	13311362	192893794	6.90
18	AWC	162536753	2440196187	6.66
19	WTF	14013072	211736244	6.62
20	MSB	17584137	287132832	6.12

To see the full Short Report, please go to this link

IMPORTANT INFORMATION ABOUT THIS REPORT

The above information is sourced from daily reports published by the Australian Investment & Securities Commission (ASIC) and is provided by FNArena unqualified as a service to subscribers. FNArena would like to make it very clear that immediate assumptions cannot be drawn from the numbers alone.

It is wrong to assume that short percentages published by ASIC simply imply negative market positions held by fund managers or others looking to profit from a fall in respective share prices. While all or part of certain short percentages may indeed imply such, there are also a myriad of other reasons why a short position might be held which does not render that position “naked” given offsetting positions held elsewhere. Whatever balance of percentages truly is a “short” position would suggest there are negative views on a stock held by some in the market and also would suggest that were the news flow on that stock to turn suddenly positive, “short covering” may spark a short, sharp rally in that share price. However short positions held as an offset against another position may prove merely benign.

Often large short positions can be attributable to a listed hybrid security on the same stock where traders look to “strip out” the option value of the hybrid with offsetting listed option and stock positions. Short positions may form part of a short stock portfolio offsetting a long share price index (SPI) futures portfolio – a popular trade which seeks to exploit windows of opportunity when the SPI price trades at an overextended discount to fair value. Short positions may be held as a hedge by a broking house providing dividend reinvestment plan (DRP) underwriting services or other similar services. Short positions will occasionally need to be adopted by market makers in listed equity exchange traded fund products (EFT). All of the above are just some of the reasons why a short position may be held in a stock but can be considered benign in share price direction terms due to offsets.

Market makers in stock and stock index options will also hedge their portfolios using short positions where necessary. These delta hedges often form the other side of a client's long stock-long put option protection trade, or perhaps long stock-short call option (“buy-write”) position. In a clear example of how published short percentages can be misleading, an options market maker may hold a short position below the implied delta hedge level and that actually implies a “long” position in that stock.

Another popular trading strategy is that of “pairs trading” in which one stock is held short against a long position in another stock. Such positions look to exploit perceived imbalances in the valuations of two stocks and imply a “net neutral” market position.

Aside from all the above reasons as to why it would be a potential misconception to draw simply conclusions on short percentages, there are even wider issues to consider. ASIC itself will admit that short position data is not an exact science given the onus on market participants to declare to their broker when positions truly are “short”. Without any suggestion of deceit, there are always participants who are ignorant of the regulations. Discrepancies can also arise when short positions are held by a large investment banking operation offering multiple stock market services as well as proprietary trading activities. Such activity can introduce the possibility of either non-counting or double-counting when custodians are involved and beneficial ownership issues become unclear.

Finally, a simple fact is that the Australian Securities Exchange also keeps its own register of short positions. The figures provided by ASIC and by the ASX at any point do not necessarily correlate.

FNArena has offered this qualified explanation of the vagaries of short stock positions as a warning to subscribers not to jump to any conclusions or to make investment decisions based solely on these unqualified numbers. FNArena strongly suggests investors seek advice from their stock broker or financial adviser before acting upon any of the information provided herein.

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